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Conceptual Framework - Presentation and Disclosure Concepts of Capital Presentation and Disclosure

The document discusses concepts related to the presentation and disclosure of capital in financial statements. It covers topics such as classification, aggregation, capital maintenance, and the difference between financial capital and physical capital concepts. Specifically: - Classification involves sorting items based on shared characteristics, and income/expenses are classified between profit/loss and other comprehensive income. - Aggregation involves combining similar items to provide summarized information in statements, while detailed information is in note disclosures. - Capital maintenance looks at net income from a transaction approach or maintaining the capital used. The financial capital concept defines capital as net assets, while physical capital refers to maintaining productive capacity.

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Ellen Maskariño
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198 views3 pages

Conceptual Framework - Presentation and Disclosure Concepts of Capital Presentation and Disclosure

The document discusses concepts related to the presentation and disclosure of capital in financial statements. It covers topics such as classification, aggregation, capital maintenance, and the difference between financial capital and physical capital concepts. Specifically: - Classification involves sorting items based on shared characteristics, and income/expenses are classified between profit/loss and other comprehensive income. - Aggregation involves combining similar items to provide summarized information in statements, while detailed information is in note disclosures. - Capital maintenance looks at net income from a transaction approach or maintaining the capital used. The financial capital concept defines capital as net assets, while physical capital refers to maintaining productive capacity.

Uploaded by

Ellen Maskariño
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 7: CONCEPTUAL FRAMEWORK – PRESENTATION AND DISCLOSURE CONCEPTS OF CAPITAL

Presentation and disclosure

A reporting entity communicates information about its assets, liabilities, equity, income and expenses by presenting and
disclosing information in the financial statements.

Effective communication of information in financial statements:

a) makes the information more relevant and contributes to a faithful representation of an entity’s assets, liabilities,
income and expenses.
b) enhances the understandability and comparability of information in the financial statements.
c) supported by not duplicating information in different parts of the financial statements.

Classification

Classification is the sorting of assets, liabilities, equity, income and expenses on the basis of shared or similar
characteristics.

Classification of income and expenses

Income and expenses are classified as components of profit and loss and components of other comprehensive income.

The Revised Conceptual Framework has introduced the term statement of financial performance to refer to the
statement of profit or loss together with the statement presenting other comprehensive income.

The components of other comprehensive income are subsequently recycled or reclassified to profit or loss or retained
earnings.

Aggregation

Aggregation is the adding together of assets, liabilities, equity, income and expenses that have similar or shared
characteristics and are included in the same classification.

Aggregation makes information more useful by summarizing a large volume of detail. However, aggregation may conceal
some of the detail.

Typically, the statement of financial position and the statement of financial position and the statement of financial
performance provide summarized or condensed information. More detailed information is provided in the notes to
financial statements.

Capital Maintenance

The financial performance of an entity is determined using two approaches, namely transaction approach and capital
maintenance approach.

The transaction approach is the traditional preparation of an income statement.

The capital maintenance approach means that net income occurs only after the capital used from the beginning of the
period is maintained.

The distinction between return of capital and return on capital is important to the understanding of net income.

Shareholders invest in equity to earn a return on capital or an amount in excess of their original investment. Return of
capital is an erosion of the capital invested in the entity.

The Conceptual Framework considered two concepts of capital maintenance or well-offness, namely financial capital
and physical capital.

Financial capital
CHAPTER 7: CONCEPTUAL FRAMEWORK – PRESENTATION AND DISCLOSURE CONCEPTS OF CAPITAL
Under a financial capital concept, such invested money or invested purchasing power, capital is synonymous with net
assets or equity of the entity.

Financial capital is the monetary amount of the net assets contributed by shareholders and the amount of the increase
in net assets resulting from earnings retained by the entity.

Net income under financial capital

Under the financial capital concept, net income occurs “when the nominal amount of the net assets at the end of the
year exceeds the nominal amount of the net assets at the beginning of the period, after excluding distributions to and
contributions by owners during the period.”

Illustration

The following assets, liabilities and other financial data pertain to the current year:

January 1 December 31

Total assets 1,500,000 2,500,000


Total liabilities 1,000,000 1,200,000
Additional investments during the year 400,000
Dividends paid during the year 300,000

Computation of net income

Net assets – December 31 1,300,000


Add: Dividends paid 300,000

Total 1,600,000
Less: Net assets – January 11, 2020 500,000
Additional investments 400,000 900,000

Net income 700,000

Note that the amount of net assets is “the excess of total assets over the total liabilities”.

This is the reason this approach is also known as the net assets approach.

Physical capital

Physical capital is the quantitative measure of the physical productive capacity to produce goods and services.

The physical productive capacity may be based on, for example, units of output per day or physical capacity of
productive assets to produce goods and services.

This concept requires that productive assets be measured at current cost, rather than historical cost.

Productive assets include inventories and property, plant and equipment. The current cost for these productive assets
must be maintained in order that physical capital is also maintained.

Under this concept, net income occurs “when the physical productive capital of the entity at the end of the year exceeds
the physical productive capital at the beginning of the period, also after excluding distributions to and contributions from
owners during the period.”

Illustration
CHAPTER 7: CONCEPTUAL FRAMEWORK – PRESENTATION AND DISCLOSURE CONCEPTS OF CAPITAL
Assume in the previously given illustration, the net assets of P500,000 on January 1 had a current cost of P800,000 by
reason of inflationary condition.

Net assets – December 31 1,300,000


Add: Dividends paid 300,000

Total 1,600,000
Less: Net assets at current cost, January 11, 2020 800,000
Additional investments 400,000 1,200,000

Net income 400,000

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